Chapter 6:

Problem 24

Julie Schmidt has requested your help in determining a cost equation for forecasting expenses for her Midstate Inn. She provides cost at two extremes as follows:

Monthly Occupancies

50%80%

Salaries$100,000$100,000

Wages150,000240,000

Benefits60,00080,000

Supplies10,00016,000

Utilities7,0008,000

Marketing8,00012,800

Depreciation5,0005,000

Property taxes2,0002,000

Other expenses15,00017,000

Required:

1.Identify each cost as fixed, variable, or mixed.

2. What are the total estimated fixed costs (including the fixed portion of mixed costs)?

3.What are the estimated variable costs per 1 percent occupancy?

4. Develop a single equation to estimate costs at various occupancy percentages.

Problem 25

Matthew College needs a new dishwashing machine. The college could substantially overhaul its existing dishwasher as well. The existing dishwasher originally cost $25,000. Details for the alternatives are as follows:

KeepReplace

Cost of new dishwasher-$30,000

Salvage value of existing dishwasher:

Today$2,000-

In five years4,000-

Major one-time overhaul costs10,000-

Salvage value of new dishwasher10,000

Annual costs:

Labor30,00030,000

Utilities2,0001,000

Repairs1,000300

Additional Information:

Assume that both options would have a five-year life.

Required:

1.Which costs are sunk?

2.Which costs are irrelevant?

3.Form a schedule of relevant costs for each alternative. (Ignore income taxes and the time value of money).

4 Which alternative do you recommend?